Merger & Acquisition - Airtel's

Acquisition of Zain in Africa

Strategic Management II
Submitted To: Prof. Ankur Roy
Term IV, PGPM 2013-15
Group 3 (Sec B)
Amitabh Gautam (13P123)
Ashima Tayal (13P130)
Dheeraj Maken (13P139)
Himanshu Jain(13P143)
Rochak Mathur (13P163)
Sumit Batra (13P176)

Acknowledgement
We would like to articulate our profound gratitude and indebtedness to Prof. Ankur Roy, who has
always been a constant motivation and guiding factor throughout the project time in and out as well. It
has been a great pleasure for us to get an opportunity to work under him and complete the project
successfully.

We would also like to extend our thanks to all our friends and colleagues at MDI and outside who
helped us by filling our internet survey. It is the support of our friends that motivated us through the
course of our study.

Finally, we wish to thank our parents for their undivided support and encouragement throughout our
study.

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TABLE OF CONTENTS
EXECUTIVE SUMMARY ..................................................................................................................................... 4
BHARTI AIRTEL LTD. ......................................................................................................................................... 5
ABOUT THE COMPANY ............................................................................................................................................. 5
CORPORATE STRUCTURE & INTERNAL ANALYSIS ............................................................................................................ 5
FIG. RESOURCE BASED VIEW ...................................................................................................................................... 6
RESOURCES & CAPABILITIES ...................................................................................................................................... 6
CORE COMPETENCIES ............................................................................................................................................... 8
INDIAN TELECOM SECTOR IN 2010 ................................................................................................................... 9
ISSUE OF DECLINING TARIFFS ..................................................................................................................................... 9
ISSUE OF SATURATING MARKETS ................................................................................................................................ 9
MOTIVATION FOR INTERNATIONAL EXPANSION .............................................................................................................. 9
LOOK TOWARDS AFRICA ................................................................................................................................ 10
MAPPING OF THE AFRICAN MARKET ......................................................................................................................... 10
PESTEL ANALYSIS OF AFRICAN MARKET ................................................................................................................... 10
PORTER'S 5 FORCES ANALYSIS ................................................................................................................................. 13
COMPETITION ANALYSIS................................................................................................................................ 16
ETISALAT ..................................................................................................................................................... 16
ORANGE ....................................................................................................................................................... 16
CHOICE OF ENTRY MODE ............................................................................................................................... 19
TYPES OF ENTRY MODES.......................................................................................................................................... 19
RATIONALE FOR ACQUISITION .................................................................................................................................. 20
ZAINS ACQUISITION BY AIRTEL ..................................................................................................................... 21
ABOUT ZAIN TELECOM ........................................................................................................................................... 21
THE ACQUISITION .................................................................................................................................................. 21
FINANCIAL VALUATIONS ......................................................................................................................................... 21
IMPLICATIONS OF THE ACQUISITION........................................................................................................................... 21
ISSUES WITH THE DEAL............................................................................................................................................ 22
AIRTEL AFRICA INITIATIVES ............................................................................................................................ 23
EMPLOYEE RETENTION............................................................................................................................................ 23
ACQUIRING CUSTOMER BASE ................................................................................................................................... 23
ROLLOUT 3G AND M-COMMERCE ............................................................................................................................. 23
ONE NETWORK SERVICES ........................................................................................................................................ 23
PROMOTIONAL ACTIVITIES....................................................................................................................................... 24
AIRTEL RISING STARS.............................................................................................................................................. 24
M-FARMER.......................................................................................................................................................... 24
PROFITABILITY JOURNEY ......................................................................................................................................... 24
AIRTEL AFRICA CURRENT SCENARIO .............................................................................................................. 25
COMPARISON OF AFRICA OPERATIONS WITH THOSE IN INDIA.......................................................................................... 27
CONCLUSION ........................................................................................................................................................ 27
REFERENCE .................................................................................................................................................... 28

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Executive Summary
The project is a strategic analysis on Bharti Airtels acquisition of Zain telecom in Africa. The
analysis begins with understanding Airtel Indias background, vision, corporate structure and
identifying the capabilities it has built over decades and the core competencies of superior network
infrastructure and product innovation, providing it a sustainable competitive advantage over other
players. Then, we identified the issues faced by Indian telecom sector in 2010, which were
prominently declining sector profitability and the saturation of the market. Airtel was sitting on huge
piles of cash, so , in such a scenario, a global expansion was a necessary step.
The further analysis is done on the macro-economic environment of Africa through PESTLE
framework and the industry attractiveness through Porters five forces. Both the analysis gave a
positive outlook on the African market, thus justifying the expansion in this continent.
Analysing the entry modes, we found that acquisition mode provided the benefits of overcoming the
entry barriers, provided an instant access to the market as well as access to the infrastructure and the
customer base of the acquired company.
The acquired company Zain telecom, was the 4th largest mobile operator in the world in terms of
geographical presence and operated in 17 African nations. The acquisition was valued at $10.7 bn and
covered access to 15 countries. It made Airtel the 5th largest wireless provider in the world. The
expectations from the acquisition were very high in terms of 3.5 times revenue growth, 11.6 times
increase in EBITDA and doubling the subscriber base from 45 mn to 100 mn by March 2013.
The acquisition witnessed various issues. The cultural issues were that the chairman of zain resigned
as he was not comfortable with the deal and hence it sent wrong signals to zains employees. There
werealso legal disputes surrounding the Nigeria unit of Zain which threatened to delay the deal.In
terms of financials, Zain was suffering with heavy losses in major African countries. It was being
questioned whether Airtel was paying Zain more than its value in this deal. So, deciding a fair
valuation of the deal was a major issue.The Average revenues per user (ARPUs) of Airtel were
showing significant falls. In 2010-11, they had dropped by a significant 12% in the fourth quarter.
Airtel Africa shown various innovative initiatives like One-Airtel Network- worlds first
intercontinental roaming facility offering free incoming calls to its customers and others like mFarmer, RAMP and Airtel Rising stars academy.
Looking at the current scenario, we can see that the revenues grew by 17.5% Y-oY and the subscriber
base grew to 69 mn with a 9% Y-o-Y growth. Also, the Data ARPU increased to $1.5 from $1.23 and
active airtel money subscribers. The African market still presents a huge opportunity for growth with
mobile penetration as low as 56% and very low minutes of usage, which can be increased further.

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Bharti Airtel Ltd.

About the Company
Bharti Airtel is the leading telecom provider in India and amongst the top 4 mobile service provider
globally in terms of subscribers. With over 190 subscribers in India and 275 million subscribers
globally, it currently has operations in 20 countries across Asia and Africa. It has its headquarters in
Delhi and is headed by Sunil Bharti Mittal, who incorporated the cellular operations as Bharti Televentures and launched services in Delhi in 1995.Since then, it has expanded its services to all the 22
telecom circles in India and ventured into multiple product offerings including 2G, 3G and 4G
wireless services, mobile commerce, fixed line services, high speed DSL broadband, IPTV, DTH,
Enterprise services.

Vision
Enriching lives means putting the customer at the heart of everything we do. We will meet their
needs based on our deep understanding of their ambitions, wherever they are. By having this focus we
will enrich our own lives and those of our other key stakeholders. Only then will we be thought of as
exciting, innovation, on their side and a truly world class company

Mission
A spirit charged with energy, creativity and a team driven "to seize the day" with an ambition to
become the most admired telecom service provider globally

Corporate Structure & Internal Analysis

Previously, the organisational structure was based on business units Mobile, Telemedia, Digital TV
and other emerging businesses. It has been restructured and the current organisational structure has
two distinct Business units with strong focus on B2C(Business to Customer) covering retail
customers, homes and small offices with offerings in mobility, Telemedia and DTH and
B2B(Business to Business) segments covering large enterprises, government covering offerings like
Network infrastructure, local connectivity, Ethernet, solutions covering voice and data
Understanding the organisation through the lens of Internal Analysis framework, where we first look
into the resources, both tangible and intangible, then the capabilities built through these resources and
then identifying and evaluating the core competencies the organisation has developed which has led to
attain strategic competitive advantage over the other telecom players in the Indian market.

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Fig. Resource based view

Resources & Capabilities

Tangible Resources:
Financial: Airtel possesses huge capital reserves to the tune of Rs 480 cr and a high borrowing
capacity which makes it easier for them to borrow capital to invest in infrastructure and licenses
Organisational Resources: There is a strong hierarchical planning and control system in place with
focus on key result areas and key performance indicators for every employee.
Physical Resources: There is an extensive tower infrastructure and a sophisticated switching centre in
place across the nation.
Technological Resources: The company possesses latest GSM technology in voice as well as data
with access to LTE & HSPA technology .It has 3G & 4G licences for 13 and 4 circles respectively for
all the 22 telecom circles in the country.

Intangible Resources:
Human Resources: It has a talented pool of 26,000 employees with a strong focus on skill
development and functional trainings covering HR as well as technological aspects.
Innovation Resources: Airtel is renowned for its vehement focus on continuous innovations with the
help of the setups like One Airtel innovation centre where there are research and development
processes on the latest technology in Value added services and Zing innovation la, which is
specifically dedicated to Open source technology development for mobile apps and softwares.
Reputational resources: It is the most trusted telecom brand in India as per the Brand Equity survey
done on customers. It also has strong reputation with network suppliers including a 10 years contract
with IBM for IT support and Ericsson for managing the network infrastructure. There is also a strong
relationship with the distributors, many of them have left their association with FMCG giants to form
its link with the company.
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Capabilities
Now, looking into the capabilities the organisation has been able to build with the intangible and
tangible resources over the period of time.

Network

With the help of latest technological resources and access to extensive tower infrastructure, It
has built a superior network infrastructure across 22 circles which covers 86% of the
population in India.
It has also developed a first of its kind Central Network experience centre to observe the
entire network elements on Airtel operations and excellent traffic management and expansion
systems built over long time.
It has outsourced its network maintenance to Ericsson and Nokia Siemens Network , the
pioneers of GSM technology, on a maintenance payment per minute model.

Distribution
There is a strong three tier pan-India distributor setup in place with around 3,000 distributors covering
more than 2,000 major cities and towns and a separate rural setup to cater to the vast rural geography
covering more than 4 lakh villages.

Marketing
Airtel has been able to put very effective promotional strategies and has produced successful
campaigns like HFZ, JTHWMH which have been counted as one the most successful campaigns.
Also, it has been able to develop many innovative and customer friendly tariff plans to cater to
various segments.

Product Innovation
It has successfully executed superior product innovation in VAS making it the pioneer of innovative
services like Hello tunes, Airtel-Money, m-Chek, Airtel Live, Mediphone, m-kisan, astrology, friends
chat, etc.

Human Resources
With its pool of large employee base and effective employee policies, it has been able to imbibe
Alive, Inclusive and Respectful values and Jobs never done before culture and created a work
force which is committed to continuously innovate on processes as well as products.

Customer service
There is a strong CSD with widespread Relationship centres (ARCs) located across the nation and a
24*7 telephonic helpline.

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Core competencies
Identifying and evaluating the core competencies it has built from the set of capabilities, which are
valuable, rare and costly to imitate giving it a sustainable comparative advantage over other
competitors and enabled it to retain its market leadership from years is relevant to the discussion.

Below is a comprehensive attempt at the same:

Capability

Valuable

Rare

Costly to
imitate

Nonsubstitutable

Consequences

Network

Yes

Yes

Yes

Yes

SCA

Product Innovation

Yes

Yes

Yes

Yes

SCA

Marketing

Yes

No

No

Yes

Competitive parity

Distribution

Yes

No

Yes

Yes

Temporal
advantage

Human Resources

Yes

No

No

Yes

Competitive parity

Customer service

Yes

No

No

Yes

Competitive parity

Competitive

Thus, we see that Network and Product innovation are the core competencies of the company, which
it can leverage to gain competitive advantage in the new geography it forays.

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Indian telecom sector in 2010

Understanding the Indian telecom market in 2010 and the issues that were troubling the telecom
operators which resulted in taking a decision on expansion

Issue of Declining Tariffs

In India, the tariff rates had declined significantly with the advent of many companies driving the call
rates downwards. For example, Tata Docomo introduced the 1 paisa per second charging schemes ,
followed the all the operators introducing similar low rate tariffs. This brought down the Average
Revenue Per User(ARPU) drastically and affected the overall profitability of the sector making the
Indian market a tough playground

Issue of Saturating Markets

The penetration levels had crossed 90% in the urban markets with over 13 telecom players competing
to gain the extra customer base and the untapped potential was primarily in the rural markets where
the setup costs were high and the ARPU was on a very lower side.

Motivation for international expansion

The declining profitability and saturating markets in the domestic market drove the company to
decide on expansion to international markets.
Bharti Airtel was sitting on huge free cash flows and it doesnt make much sense for the company to
keep sitting on the huge pile of cash when it can be utilised for productive asset. Also, there would not
be much problems in servicing the debt raised to fund the expansion

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Look towards Africa

Mapping of the African Market
The penetration levels in Africa were around 33% and the ARPU levels were high varying from $8
12 (apart from Kenya and Ghana where it is closer to India ARPU levels of $4). The level of
competition in Africa was not as intense as India as most of the countries had no more than 4-5
operators.

PESTEL Analysis of African Market

We use PESTEL analysis as a framework to analyze and monitor the macro-environmental factors
that have an impact on the organization. The result of which is used to identify threats and weaknesses
which could be helpful in further analysis
The figure shown below depicts the PESTEL analysis:

P- political factors
-Many African countries just out of the
civil war
-Corrupt previous governments have left
behind disorderly regulatory regimes.
-Governments tend to intervene in the
industry

L - legal factors

E - economic factors

-Unified licensing introduced in 2006

-Continuing liberalization of VOIP
-Privatization of national
telecommunications services in the region
is continuing with significant premiums
over reserve prices being paid

-6% growth rate predicted in the sector

for the year 2011 in Africa
-Very fertile market, with a significant
increase in consumption of new
technologies -Tremendous investment
in the sector since 2007

S - socio-cultural factors

E-environmental factors

-Women in sub-Saharan African

countries contribute over 40% of the
economic activity of most nations
-The literacy of women is low
-Increase in the use of mobile phones

-Stress on saving energy due to high energy

consumption in the industry
-New technologies for energy saving
network towers and grids

T - technological factors
-3G mobile services
-Expansion of GSM networks
-Upgrades in data transmissions due to
rapid growth of ADSL and wireless
broadband services

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Political factors
As already suggested in the figure above the major points highlighting the political factors are:

Many African countries are just out of the civil war

Corrupt previous governments have left behind disorderly regulatory regimes
Governments tend to intervene in the industry

In order to quantify the political risk we used the Ibrahim Index of African Governance. The top
three countries in Africa based on Ibrahim index are:
1. Mauritius
2. Cape Verde, and
3. Botswana (2011 Ibrahim Index, higher ranking indicating better governance)
In order to factor in both political risk and corruption, it might be helpful to add in both the Ibrahim
Index and the Corruption Perception Index. The top three countries in Africa based on Corruption
Perception Index (CPI) are:
1. Botswana
2. Cape Verde, and
3. Mauritius (higher score means very clean while lower score means highly corrupt)
Its worth mentioning that Africa is so diverse when it comes to development, governance and
corruption perception that it has countries such as Botswana which has CPI of 6.1 and Somalia which
has the least CPI of 1.0. (Most corrupt).
Strong connections to government or business officials in a country, would obviously make this
country much more attractive as a place to start.

Economic factors
Several factors that helps in finding out the attractiveness of a region to do business are the current
size of the economy, the growth potential, and the political risk. In terms of current size (2008 GDP,
World Bank ADI), Mauritius drops to 27th place and Rwanda to 33rd. In contrast, the top three are
South Africa, Nigeria, and Algeria. In terms of growth potential (2008 GDP growth annual %, World
Bank ADI), South Africa is down at 28th place, with the top three being Equatorial Guinea, Angola,
and Sierra Leone.
Using the World Bank's Africa Development Indicators, we put equal weight on doing Business
rankings, current GDP, GDP growth %, and Global Competitiveness rankings. The top three countries
from this combination are South Africa, Nigeria, and Ethiopia

Socio-cultural factors
The largest consumer market is definitely Nigeria with over 100mn people. It has a fast growing
middle class with plenty of expendable income. South Africa, Egypt and Kenya are all about half the
size but also have fast growing middle classes. Rwanda and Ghana are also contenders but have a
much smaller middle class and even smaller upper class. Looking at other socio-cultural factors these
are the observations:

Women in sub-Saharan African countries contribute over 40% of the economic activity of
most nations.

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It has been observed that there has been increase in use of mobile phones in the sub-Saharan
Africa region in recent years.
The literacy of women is low, the lowest literacy rates are observed in sub-Saharan Africa
and in South and West Asia. Adult literacy rates were below 50% in the following 11
countries: Benin, Burkina Faso, Chad, Ethiopia, Gambia, Guinea, Haiti, Mali, Niger, Senegal
and Sierra Leone.

Technological factors
The technological factors contribute a lot to the attractiveness of the country for telecom industry.
These are :

Availability of 3G mobile services

Expansion of GSM networks
Upgrades in data transmissions due to rapid growth of ADSL and wireless broadband services

As far as physical infrastructure such as roads and electricity are concerned, South Africa is ahead
with its very first world cities. But Kenya, Ghana and Rwanda are well ahead in broadband and
mobile connectivity.

Environmental factors
Although environmental factors do not factor in much when deciding the risk and attractiveness of a
country but few factors were identified and needs to be factored in:

Stress on saving energy due to high energy consumption in the industry

New technologies for energy saving network towers and grids

Legal factors
The legal factors contributing to the industry attractiveness are :

Unified licensing introduced in 2006

Continuing liberalization of VOIP (Voice over internet protocol)
Privatization of national telecommunications services in the region is continuing with
significant premiums over reserve prices being paid

Infrastructure around tax, company registration, and political stability would likely put Mauritius and
Rwanda in the lead for stability and reform respectively. Kenya is not bad, with Nigeria chaos and full
of corruption and bribery (along with Egypt).

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Porter's 5 Forces Analysis

Significance of Porter's 5 Forces
The Porter's 5 Forces model would help in assessing the power in the business situation, by
understanding the current competition and the strength of the position in the business so that wrong
step can be avoided. The five forces determining the competitive power in the industry are and the
significance to an organisation are:
1. Bargaining Power of Suppliers: help in assessing how easy it is for suppliers to drive up
prices. The lower it is, the more attractive is the industry, offering more power to the
organisation.
2. Bargaining Power of Buyers: help in assessing how easy it is for the buyers to drive down the
prices. The lower it is, the more attractive is the industry, offering the power to dictate terms
to the organisation.
3. Rivalry amongst Established Firms: help in assessing the strength of competition in the
industry. The lower the competition, the more attractive is the industry, offering tremendous
opportunities to the organisation.
4. Threat of Substitution: help in assessing how different products/services can suit as
alternatives. The lower it is, the more attractive is the industry.
5. Threat of New Entry: help in assessing the ease with which a competitor can enter the market.
The lower it is, the more attractive is the industry, offering the organisation a favourable
position in the industry.

It is important to define the industry correctly and identify the stage of industry lifecycle at the time of
analysis. Inter alia, trade policies, regulations etc. make an important element. Thus the
macroeconomic factors in the economy and the government factors play as the sixth leg in the
decision making. The significance is high when cross-border operations are involved.
In conclusion, the analysis helps in determining the profitability in a specific industry, helping
organisations in decision making process pertaining to whether to enter the industry, whether to
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increase/decrease business in the industry etc. So carrying out Porter's Five Forces analysis here is
critical to assess the strength of attractiveness and competitive intensity for Airtel in the African
Telecom Industry.

Porter's 5 Forces Analysis for African Telecom Industry

Bargaining power of suppliers: HIGH

For the telecom sector, the suppliers are those who providers of mobile handsets, broadband
switching equipment, fiber-optic cables etc. There are few dominant suppliers for the sector
since there is limited pool of talented managers and engineers, because they have to be well
versed in the latest technologies.
The brand of the supplier is very strong. For eg. If Apple enters into exclusivity contracts with
a supplier, no telecom company would be able to avail that specific model.
Secondly, supplier's role in the quality of the service is huge. If a company's signal service is
weak in a certain area, the customers in that region would switch the telecom service provider
for provide better reception. Hence suppliers control the quality and ability of the service
providers through high/low costs. For eg. In Africa, in 2006, SNO had the worry of having
Telkom act as supplier as well as competitor posing a dilemma of pricing its services.

Bargaining power of customers: HIGH

Africa market size is huge. While in developed nations, the market has reached saturation
levels, in Africa the market is growing very fast at the moment and it is expected to show
increasing trend in the future. Telephone and data services do not vary much from one
company to another. Buyers seek low prices for telecom services. Customers will prefer that
company which will provide better price and better technology. The customers switching
costs are low hence airtel has to provide such features which would keep them loyal to the
company.
Competitive rivalry within an Industry: Moderately High
Major competitor players in the industry were: Virgin(in JV with Cell C), Vivendi(acquired
53% of Maroc Telecom), Etisalat(direct investment and acquisition mode with aggressive
strategy and then rebranded as Moov), Vodafone(entered through acquisitions and JVs and
targets on shifting focus to high-end data services) and Orange(USP is low cost handsets it
offers). Airtel offered a range of products and excellent customer care. Each player can offer
differentiated product and service at differentiated costs to cater to their own target segments
as per its capabilities and competitive strengths. Companies that are successful are because
they introduce new technologies and hence are able to charge higher prices and achieve
higher profits, until competitors imitate them or competitors enter into price collusions.
The number of competitors is a worry to Airtel. Rivalry is more intense when there are
comparable sized competitors. However, there is a clear market leader in most African
countries which lowers the threat of rivalry. But all the players fight to increase their market
share and that increases the threat.
Also, since the investment in an acquisition or JV is huge, it is unwise to enter the market
with an incompetent strategy, then fail and exit. All the companies in the telecom industry
play with huge amount of capital and pursue aggressive growth strategies.
Threat of substitute products or services: MODERATE
The substitutes are VOIP, Internet Telephony and fixed lines(obsolete).

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VOIP (Voice Over Internet Protocol) is a way to transmit voice conversations over a data
network using IP. Internet telephony or peer-to-peer telephony allows voice conversations
between PCs over the public Internet using IP. However, the quality of the sound is a huge
barrier to substitution. Also, the low costs for local calling wins over the substitutes, though
they may be preferred for long-distance calls.

Threat of new entrants: LOW

The capital investment required to enter the telecom industry in Africa is very high since the
infrastructure here is obsolete. Also, the regulations and legal barriers make getting the
telecom licenses difficult and hence there is trouble in distribution. Customer loyalty in this
kind of industry is quite high so, that is a factor that could motivate strong-branded companies
to establish themselves in Africa.

Stage in lifecycle: The Telecom sector is still in the developing phase in Africa. While the Telecom
industry is already saturated with ARPU declining in the developed markets, Africa offers a huge
potential and growth opportunity.

Force

Key Factors

Relevance Favourable

Number of suppliers of each essential input

Uniqueness of their product/service
Their strength/size and control
Cost of switching from one to another

+
+
+
+

No
Yes
No
Yes

Number of buyers
Importance of each buyer
Price sensitivity
Cost to switching from one supplier to another

+
+
+

Yes
Yes
Yes
No

Competitive Number of competitors

Differentiation in product/service offered
Rivalry
Costs to exit the market

+
+
+

No
Yes
No

Threat
of Alternatives available
Substitutes Uniqueness of your product/service
Cost of switching

+
+
+

Yes
Yes
No

+
+
+
+
+

Yes
Yes
Yes
Yes
Yes

Suppliers
Power

Buyers
Power

Risk
Entry

of

Time and capital required to enter the market

Regulations/Government policies in the industry
Existing patents/Technology barriers
Economies of scale the industry offers
Customer Loyalty

Conclusion: The motive of the Porter's Five Forces analysis was to answer the question: "Was the
telecom industry in Africa attractive for Airtel?". Well, the answer is Yes.
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Competition Analysis
Etisalat
Etisalat is the 12th largest telecom supplier in the world with a subscriber base of over 135 million. It
has its operations in more than 18 countries across Asia, Africa & the Middle East. Etisalat is on
aggressive strategy, acquiring 30% market in a span of less than 24 months. Currently, this company
has also involved itself in new product innovations.
The weakness of the company is that it seems to be lacking a brand strategy as it is projecting a
heterogeneous image. Also, the high level of geographic unevenness is affecting the market
understanding and making it difficult to manage the operations.
Etisalat sees opportunities in entering emerging markets with currently low penetration but offering
huge potential. As it promises to offer better services than its competitors, its likely that it will gain a
good market share in the recent future. But at the same time, posing into new territories may offer its
own share of risks in the form of decreased profitability due to lack of proper strategy. Growth of
local competitors and changes in the political scenario makes the situation more volatile.
Strategy:

Not maintaining a leadership position but expanding into more countries to service more
customer base
Aims to diversify into sources of income-regionally and internationally; with a view of
entering markets where there is low penetration but high potential
The focus seems to be on private customers and naturally the business sector as they offer
stable profit

Orange
Orange enjoys the status of being the 7th largest Telecom service provider in the world. In 2006, it was
1st in terms of Operations in Africa. Only the region of Africa yielded 3.4 billion euros in 2006. This
company enjoyed strong brand equity. The weakness lied in the inability to cope with the economies
to scale. Also the company possessed a weak supply chain network.
Orange had a strong and loyal customer base. It also was well ahead in terms of utilizing its capacity
in the field of online selling. But at the same time, cheap technology and easy substitution of products
were the inherent difficulties.

Strategy:

Goes for a non-leadership status. It has as of now, started its operations in 15 countries. It
initially focused on the French speaking territories of Africa. Eventually, it expanded itself to
the English speaking areas and even the core rural consumer base.
It was among the first in Africa to upgrade itself to the 3G technology.
It also offers low cost mobile phones.

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It also focuses on the importance of acquiring internet using consumers. In Kenya, Orange
came out with a very low cost scheme to become the most affordable internet service provider
in Kenya.
It also came out with Orange Money services to lure customers towards the facility of online
payment services.

Virgin Mobile
Virgin Mobile is the 3rd largest mobile operator. It has over 7.4 million subscribers with a net density
of around 20%. The core strength of Virgin mobile is its strong marketing campaigns and creative
advertisements through which it has been able to attract many of its subscribers.
Virgin is looking forward towards opportunities in the HSPA and network expansion through various
contract deals. It provides great opportunity of community development through its innovative and
utility products and services.
Some of the areas where Virgin is not particularly strong are (i) Its network costs which are relatively
higher than those of its competition; (ii) The internet connectivity provided is not at par with limited
internet access; (iii) The distribution channel is weak with very few points of sales.
Due to the above weaknesses, Virgin mobile faces strong competition from the local players in terms
of price competitiveness and this is a major threat for the company
Strategy:

Virgin mobile has entered the market of South Africa in 2006 through a joint venture with
Cell C which is a 100% owned subsidiary of the company 3C Telecommunications
Further, as a part of its expansion strategy, Virgin aims to explore more opportunities of
strategic ties with different local players in order to develop its core competencies according
to the Africa market
The strategy aims to support the local knowledge of the firms with Virgins marketing skills
and the know-how of how to attract customers via creative marketing campaigns

Vivendi Telecom
Vivendi Telecom is the top leader of telecommunications in the regions of France, Morocco and
Brazil. It aims to expand globally and thereby establish strong international brand recognition.
Vivendi is known for investing heavily in its assets and has a large product range which is diversified
across three major categories: telecommunications, music production and cable TV network. As a part
of its global aspirations, Vivendi aims to expand via partnerships and co-operations in various
industries across different countries. Although due to the financial crisis, Vivendi is facing some
liquidity issues but it utilizes every opportunity of economic recovery.
Vivendi has intense control over all of its subsidiaries, but it sometimes leads to the issue of its
telecom operators behaving as dumb and irresponsible. The scale of this issue gets enlarged when we
consider the increasing competition in the telecommunications industry.
Strategy

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Vivendi acquired 53% of Maroc Telecom which was the 2nd largest operator in Africa. It had
15.3 million mobile telephone customers.
The global strategy of Vivendi supported this acquisition by expanding geographically
through parallel acquisitions of Mauritel in Mauritania, Gabon Telecom and Sotelma in Mali,
and Onatel in Burkina Faso.
In order to attract customers and develop brand recognition, it introduced the concept of
Mobi Cash in Morocco which was the first mobile money transfer and payment option
there. Further, it supported this initiative with intensive marketing campaigns and promotional
offers.

Vodafone
Vodafone is the leader in the mobile telecommunications industry. When ranked by the turnover, it is
the largest mobile telecommunications network company. Its huge network comprises of 332 million
customers which represent 7% market share globally. Along with a high scale, it has great
geographical reach as well. It operates in over 30 countries and has further partner networks in 42
more countries. With such large scales, the major weakness with the company is that it results in low
flexibility which is an important factor in the telecommunications industry.
In order to make up for the flexibility issue, Vodafone is expanding its market boundaries and is
looking to foray into new markets. A major opportunity identified by Vodafone for the same is the 3G
market which promises high growth potential. The only major threat for Vodafone is the increased
competition in telecommunications (specially by Airtel)
Strategy

As most of its competitors, Vodafone also followed the route of Mergers, Acquisitions and
Partnerships as part of its market expansion strategy. Some of the major ones were:
(i) Joint Venture with Telkkom and Venfin in South Africa in 1993 which was known as
Vodacom
(ii) Acquisition of Safaricom in Kenya in 2000 and Ghana Telecommunications in 2008
(iii) Non-equity partnership with Almadar Aljadid in Libya in 2010
As Vodafone aimed at extending its market boundaries, it shifted its focus towards new
markets including multi-media and high-end data services.
Further, it included IT services in its diversified range of product portfolio in order to attract
the business segment as well.

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Choice of Entry mode

Types of entry modes
There are a number of options available with an organisation in order to enter a new market or new
product in the new market. They are briefly listed here:

Licensing
It provide a right to a foreign company to purchase the right to manufacture and sell the firms
products within a set of countries
Pros:
Low cost setup, low risk and useful for products with low life cycles
Cons:
Gives the firm a little control and provides the least potential results which is not required in a
telecom setup where the capital costs are very high and also many a times, the policies and
regulations do not favour such a setup

Strategic Alliances
It allows firms to share the risks and resources required to enter the international market
Pros:
Shared costs, shared resources, shared risks and also the host country has a better understanding of the
competitive conditions, legal and cultural aspects of the region.
Cons:
Conflict between the partners and the problems of integration due to differences in the regions
culture and organisational culture causing high degree of failure of such alliances. Also, it provides
comparatively lesser control and returns over an acquisition

Acquisition
Pros:

Acquisitions made between companies with headquarters in different countries are called
cross-border acquisitions.

The economies of scale create a lot of entry barriers. Facing these barriers, a new entrant may
resort to acquiring an already established company there rather than entering the market as a
competitor.
The biggest advantage a company achieves by using acquisition strategy is that it gains an
instant access to the market. This would not have been possible had the company tried to
enter as a competitor.

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The incentive of gaining instant market access is particularly advantageous for companies
looking for entering international markets.
The company gets operational capabilities and infrastructure of other companies.

Reasons for Indian firms being more involved in cross-border acquisitions are:

Relaxation in Government regulations

Scope of rapid market entry
Provides opportunities to develop product innovation capabilities

Cons:
High cost, complex negotiations, issues of merging with domestic operations. This goes without
saying that the cross-border acquisitions are not risk free. Before entering into any deal, the firms
must closely analyse the risks involved vis--vis future benefits.

New wholly owned subsidiary

Pros:
Highest returns and maximum control
Cons:
It is a highly complex and time consuming process involving huge costs in setting up the tower
infrastructure and acquiring the customer base right from the basics.
Thus, the most favourable choice of entry is acquisition of a domestic player which has extensive
presence in the continent as well as high customer base and a strong brand image.

Rationale for Acquisition

The acquisition would provide airtel the opportunity to have full access to infrastructure already built
by zain. The airtel would now just be required to build upon that infrastructure and use its own
excellence to get the best out of those provided platforms.
The biggest reason why this deal made sense for Airtel was the low financial leverage involved. By
the end of the financial year 2009, Airtel had a very low Net debt to equity ratio, precisely 0.05.
Though it is good to have low debt; but zero debt has its inherent complications. Zero debt implies
that a large chunk of profits goes as shareholders earnings. So, rather than providing high dividends
to shareholders, Airtel found it more reasonable to increase its debts and pay interests with
expectations of higher profits in the future.

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Zains acquisition by Airtel

About Zain telecom
It is a major mobile telecom company which was founded in 1983 in Kuwait as MTC and later
rebranded to Zain in 2007 to reflect the growing status as a multinational telecom provider having
global aspirations.In 2008, it became the 4th largest mobile operator in the world in terms of
geographical presence with operations in 17 African nations and 7 countries in the middle east. In
March 2009, it entered into a 50:50 partnership with Al Ajial investment fund holding to acquire a
31% stake in Inwi Morocco.

The acquisition
Bharti Airtel entered on a deal with them on March 30, 2010 to acquire their operations in 15 African
nations (excluding Sudan & Morrocco). The deal was officially complete on June 8, 2010 for a value
of $10.7 billion. This acquisition enhanced Airtels reach to the other level. As of now, Bharati
Airtels reach was restricted to the Indian subcontinent. This acquisition did not just allow Airtel a
presence in the much coveted presence in the emerging African markets, but also made Airtel the 5 th
largest wireless provider in the world with presence in 18 countries and with a subscriber base of
almost 180 million.

Financial Valuations
Total enterprise value of the acquisition stood at $10.7 billion. Of this $8.3 billion was paid upfront by
airtel with an agreement that $700 million would be paid in a years time. Airtel also took over $1.7
billion of standing debts of Zain telecom. Airtel raised this total value by raising debts from foreign &
Indian banks.
The valuation for this $10.7 billion deal of Airtel can be summarised as below:

A per subscriber proportionate value of $320

An expected growth in revenues by almost 3.5 times
An expected 11.6 times increase in EBITDA
A considerable advantage over MTN who was the biggest telecom service provider in Africa

Implications of the acquisition

The biggest challenge of Airtel was to convince its own investors that the Zain telecom acquisition
was worth a deal. The shareholders had shown displeasure as just after the two companies started
talks for a possible acquisition, Airtel shares dipped by 9.2%. This reaction of the investors may seem
a bit far-fetched. The valuation of Zain Telecom ($10.7 billion) is much in line with the current
transactions involved in acquisitions.
Risks involved:

Zains African operations needed high investments

Entry into a completely different market has its own complications (Airtel lacked the
experience for the same)
Nigeria (2nd largest growing telecom market in Africa) Zain telecom was already losing
grounds.

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Issues with the deal

Cultural Issues

Like every merger, there were cultural issues in this deal as well. Just a few days ago when
the deal was announced, the then Chairman of Zain, had announced his resignation which had
been accepted too.
The corporate culture at Zain under the leadership of Al Barrak was highly influenced by his
go getting style and was very different from that at Bharti. Thus, Airtel would face great
integration problems in the African operations.

Legal Issue
There were legal disputes surrounding the Nigeria unit of Zain which threatened to delay the deal.

Financial issues

At the time of Acquisition, the African business of Zain showed $2 billion of debt in its books
In the key markets with more than 35% mobile penetration, such as Ghana, Nigeria and
Uganda, the business operations of Zain were suffering losses due to tough competition from
MTN. The magnitude of this was so high that Zains African operations showed $111 million
losses over nine months in 2009. It was very difficult for Airtel to turn around these losses.
A major issue was pertaining to valuation. With the above mentioned problems, it was being
questioned whether Airtel was paying Zain more than its value in this deal. So, deciding a fair
valuation of the deal was a major issue.
As soon as the acquisition took place, there was a huge fall of 27% in the consolidated net
profit of Airtel and the major reason was the losses it incurred from the deal of acquisition of
Zains operations in 16 countries in Africa.
The books of Airtel showed a net profit of Rs 1,661 crore in the quarter 2 of 2010, which was
a huge downfall from the previous years profit in the same quarter which was Rs 2,263 crore.
Further, the Average revenues per user (ARPUs) of Airtel were showing significant falls. In
2010-11, they had dropped by a significant 12% in the fourth quarter.
Also, the firms profits experienced a hit due to the higher tax rate from the African assets on
an average. For India, the tax rates had averaged out to around 16-18%, but they were around
30-35% on an average in Africa.

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Airtel Africa Initiatives

Employee retention
The acquisition involved shifting nearly a third of the 6500 African employees of Zain to partners like
IBM, Ericsson and Nokia Siemens. The employees feared that they would lose their jobs. So, Bharti
offered them a special package- to transfer them on existing terms and conditions and they had the
option to come back to Bharti within a span of 2 years.Also, most of the ex-Zain employees
underwent a rigorous retraining program to inculcate the Airtels values and work culture in them.

Acquiring customer base

Bharti initiated heavy price wars by bringing down tariffs by 50% in many countries. They believed
that Zain is charging a premium price and it needs to be cut down to competitive levels. The
subscriber base has significantly increased, although the ARPU fell down.

Rollout 3G and m-commerce

Invested $1.2 bn to roll out 3G networks in more than 10 countries and manoeuvred to replicate the
m-commerce model in all African countries to improve upon the ARPU and overall profitability.

Cost efficient
Majority of the African players are working on the western model of operation and thereby charging a
30-40% premium charges. Bharti planned to replicate their low cost model of India. This involves
outsourcing network maintenance to partners like Ericsson, Nokia Siemens and also initiated sharing
of tower infrastructure with the competitors and also plans to form a tower sharing JV on the lines of
Indus towers in India

One network services

The One Network Services introduced by Airtel can be considered as a borderless mobile phone
network which can be accessed in all the countries that are under Airtels operations. It is the worlds
first intercontinental roaming facility offering free incoming calls to its customers.
One Airtel service was aimed to ease the burden of roaming costs on the consumers specially to
benefit African businessmen, tourists and students traveling to various countries in Asia. This service
leverages the strong network reach of Airtel in the countries of South Asia, specially India, Sri Lanka
and Bangladesh. Obviously, the customers can also avail this facility across Airtels network in 17
countries of Africa. These countries where this service is available in Africa are Burkina Faso, Chad,
Democratic Republic of the Congo, and Republic of the Congo, Gabon, Ghana, Kenya, Malawi,
Madagascar, Niger, Nigeria, Rwanda, Seychelles, Sierra Leone, Tanzania, Uganda and Zambia.
The benefits of the One Network services are immense. Apart from receiving free incoming calls, the
customers will also enjoy the benefits of being treated as virtual local consumers of the nation they
visit and thereby, they would only have to pay the local rates of the visited network if it is under the
One Network. Thus, it allows customers to make outgoing calls/SMS at same rates as the local
customers.

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On the benefits of the One Network service, Andre Beyers the Chief Marketing Officer for Airtels
operations in Africa, said By introducing a flat and attractive roaming rate for data and SMS use,
Airtel will help lower the communication cost for millions of frequent business and leisure travelers
across the countries that we operate in. This suggests that the service is not only intended for
customers who want to use their home number while roaming, but it also aims to benefit the vast
majority of smartphone users who would be able to use various data and internet apps at a flat and
attractive rate.
Further, availing the service is also very easy and hassle free since it is enabled automatically in the
covered network of 20 countries in Africa and Asia. The African customers dont need to buy a new
sim.
Strategically, the service is very well designed keeping in mind that the number of travelers from
Africa to the 3 Asian countries of India, Sri Lanka and Bangladesh has been growing significantly. In
fact, India is one of the major hubs for most of the African customers who seek trade, education or
affordable medical facilities. Therefore, this service would also help in increasing the intra-regional
trade between South Asia and Africa, which is a key economic factor, currently valued at 60 Billion
US Dollars.

Promotional activities
Airtel Africa has appointed RAMP (Real African Media Partners) as its mobile advertising partner to
serve mobile adverts to Airtel customers.The new mobile advertising proposition will open up mobile
advertising to local, Pan-African and global brands and advertisers, giving them the opportunity to
reach and engage consumers in several of the continents best performing economies in 17 countries
across Africa

Airtel Rising stars

It was a Youth football initiative started in 2011 in 15 countries and was aimed to identify and nurture
budding soccer talent from grassroots onto an international stage.It has seen responses from 11,000
teams

M-Farmer
It was Launched in partnership with Bill and Melinda Gates foundation and the major objective was
to provide 2 mn small farmers across Sub-Saharan Africa access to affordable agricultural information

Profitability Journey
It saw signs of growth in Africa after three quarters on a shift from just customer acquisition. Now,
the strategy involves focusing on markets with high-value customers and high-ARPU retail
customers. The investment first started to pay dividends when revenues from Africa crossed the one
billion dollar per quarter mark for the first time in the quarter ending in September, 2011, an increase
of 23 per cent over the previous year. Third Quarter Report of 2012 from Bharti Airtel indicates
revenues from the companys 16 Africa operations, including Ghana, rose 16.1 per cent, year-on-year,
to US$1.06billion.This indicates Airtel Africa is showing positive prospects after just 18 months after
it changed hands from Zain Africa.

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Airtel Africa Current scenario

Revenue: Africa revenues grew by 17.5% Y-o-Y in INR terms and 12.1% in constant
currency terms. Data revenues stood at US$ 102 Mn for the current quarter, contributing 8.8%
of overall Africa revenues vis--vis 5.3% in the corresponding quarter last year.
Subscribers: Airtel has 69.44 million subscribers in Africa as in March 2014, which shows a
growth of 2.0% QoQ and 9.0% YoY.
Other statistics: Data ARPU increased to US$ 1.50 from US$ 1.23 in same quarter last year,
enabled by 36.7% increase in data usage per customer. Active Airtel Money customers have
risen by 222.0% Y-o-Y to 4.3 Mn

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Airtel operates in 17 countries in Africa. Here are some of the statistics for major 12 countries:

Market Share
80%
70%
60%
50%
40%
30%
20%
10%
0%

It maintains market leadership in 10 out of 17 countries and more than 30% share in 11countries.

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Comparison of Africa operations with those in

India

Conclusion
Looking at the acquisition strategy of Airtel, we could see that there were initial hiccups in terms of
cultural, legal and financial issues. But, we see that Airtel has been able to leverage on it core
competencies of Network and product innovation to expand its services from the existing customer
base and geographical regions and came up with new services relevant to the African market like mFarmer, football academy campaigns, m-commerce, One-Airtel network and other data plans, which
has enabled it to gain market leadership in most of the countries and led to revenue growth, subscriber
growth and data ARPU growth to the tunes of 17%, 9% and 36% Y-o-Y, respectively and setup the
largest 3G market in entire Africa.
Initially, the focus of the company was to penetrate the market with high customer acquisition costs.
Now, after establishing the market leadership, the focus should shift to inculcate value out of these
customers with focusing on high ARPU retail customers and draw the customers to data based
services. Since, the penetration is still low(56%) and data reach is abysmally low, it provides a huge
opportunity for the company to capture the untapped market and maintain its leadership pan-Africa.

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Reference
http://blog.transparency.org/2011/11/30/corruption-perceptions-index-2011-a-call-to-action/
http://www.uis.unesco.org/literacy/Documents/fs20-literacy-day-2012-en-v3.pdf
http://www.zain.com/about-zain/overview/
http://knowledge.wharton.upenn.edu/article/african-venture-promises-and-pitfalls-of-bhartis-dealwith-zain/
http://www.airtel.in/wps/wcm/connect/4778d715-1ae6-43c5-a9dc68f0eee88979/Bharti_Management_Presentation_Vfc.pdf?MOD=AJPERES&CONVERT_TO=url&
CACHEID=4778d715-1ae6-43c5-a9dc-68f0eee88979
http://www.4-traders.com/BHARTI-AIRTEL-LIMITED-9059084/news/Bharti-Airtel--Africanrevenue-edges-up-2-in-FY2014-held-back-by-lower-voice-prices-weak-currenci-18377449/
http://www.airtel.in/wps/wcm/connect/57100856-cc0a-4405-8405-a4e1f739232a/Bharti-AirtelLimited_Press-Release_June+30-2014.pdf?MOD=AJPERES

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